The pound fell to a six-month low against the euro on Friday after a mixed bag of economic data for both the eurozone and the UK favoured the single currency.
UK economic growth held steady for the year in September 2023, remaining at 1.5% instead of declining 1.1% as markets had expected. While the UK is yet to slip into a technical recession, any chance that the Bank of England may hold interest rates for longer than expected would have a significant impact on borrowing costs across the board.
Bank of England governor Andrew Bailey and the Bank’s chief economist Huw Pill both warned that inflation was still too high, discouraging expectations that interest rates could be slashed as early as the summer.
European Central Bank (ECB) vice president Luis de Guindos warned traders to hold their horses on rate cuts, saying, “Any discussion about interest rates is premature.”
On Friday, the University of Michigan consumer sentiment fell to its lowest level in six months amid growing concerns about the negative effects of high interest rates and the ongoing war.
Any changes to the geopolitical situations in the Middle East, where Benjamin Netanyahu rebuffed a ceasefire-for-hostages offer, will be watched keenly. The ongoing conflict has already had a sizeable impact on risk markets and commodity futures.
Meanwhile, the Bank of England has asked more than 50 firms – among them asset managers, pension funds, and insurers – to take part in a simulated shock to the UK’s sovereign bond market. The move follows a period of wild volatility last autumn when the liability-driven investment (LDI) strategies of major money managers were destabilised around the mini-budget.
The coming week is set to be dominated by eurozone quarterly GDP growth, followed by Spanish and Italian inflation. Germany will also share the outcome of its ZEW economic sentiment index, a key indicator of confidence within Europe’s largest economy.
The US and the UK will both release their respective inflation and unemployment rates, for UK investors, this should provide further guidance. Retail sales data will also be a point of emphasis for US-focused accounts with Thanksgiving and black Friday just weeks away.
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